POA Positioning for Recoveries – CNBM (3323.HK) Meeting takeaways
We have arranged a group meeting with CNBM’s Senior Investor Manager today and have below key takeaways:
Salient Points in Management Presentation:
1. Management is optimistic to meet their full year sales volume target. CNBM has disclosed their cement product price trend further downward in May and as of Jun (to RMB332 per ton) from its 1Q level. Despite so, the market situation is largely in line with management expectation. It is less likely to see vicious market price war to happen for the industry. Although management believe that current cement sales sentiment is likely to maintain until August, the company has held their full year sales volume target unchanged at 2% decline for 2022.
2. Further synergies are expected from the group asset restructure plan. Under the latest development plan, Tianshan Cement will take over 51% stake in Ningxia Building Materials Group and the operation in Qilianshan Cement by end of the year. This could help the segment to benefit better cost synergy across the business lines going forward. Also, the company has plan to accelerate its new materials development by 2025.
3. Debt reduction progress is overall on track. CNBM has set a lower capex budget at RMB35b in 2022 from RMB40b a year ago; whereas maintain their debt reduction plan of RMB10b this year to bring net gearing level down to c.70% by year-end.
Top 3 questions
Q1: How does the industry competitive landscape differ post -Covid environment?
Answer from mgmt: The silo level has started to decrease over the past week. In view of the continuous infrastructure demand pick up, there would see support for cement price ahead. Over the longer run, it is less likely to see vicious market price war to happen for China cement industry considering overall competitiveness of cement producers has improved along the supply side reform. For CNBM, it would also focus on the carbon reduction as the mid -term target (2025) by 40% of its total capacity to meet the industry standard, versus national’s 30%.
Q2: What is management’s take on the potential price cut to continue in the Eastern China or other markets?
Answer from mgmt: In 2021, the sales split among infrastructure, property and other were 50:30:20. CNBM’s cement price has dropped to RMB344 per ton and unit GP to RMB59 per ton as of May. Management has highlighted the silo level has signed to decline since mid-Jun amid the off -peak production arrangement. In view of the infrastructure demand pick up, it would benefit both sale volume and cement GP rebound into 2H.
Q3: Which sub-product line among the company’s new materials segment would be the focus over the next few years?
Answer from mgmt: The company expects the non-cement segment growth of >10% this year and aim to represent 45% of total earnings by 2025. Glass fiber would become a fast-growing driver and target to share 50% of the global market. They also foresee rapid development in other products like gypsum board and engineering services.
In all, we maintain our view that the share would benefit from the catalysts including the gradual cement GP improvement and rapidly growing new materials development. We have BUY rating and TP HK$11.0.